Revisiting Certificate of Need

On Tuesday, September 16, Michigan’s Senate Majority Leader Randy Richardville introduced a new bill that once again addresses the controversial Certificate of Need (CON) program. Senate Bill 1073 proposes some reforms to the CON Commission, while also creating opportunities for new hospital projects that meet very specific guidelines. The conversations around this bill are bringing to light the underlying purpose and value of Michigan’s CON program, a topic CRC thoroughly explored in a 2005 report, The Michigan Certificate of Need Program. Although this report is nearly a decade old, the bulk of the report provides context and background for the issue, including a discussion on CON’s effectiveness in addressing health care costs, quality and access, and is still relevant to issues introduced in Tuesday’s bill.

BackgroundMichigan is one of 36 states with CON laws, but the stringency and scope of the laws vary by state. Michigan’s CON program was enacted in 1972, is governed by Part 222 of Public Act 368 of 1978, and is administered by the Department of Community Health. With the legislated purpose of assuring availability and access to quality health care at reasonable prices, the overall approach of Michigan’s CON program has been to regulate the utilization of facilities and equipment and the location of services. Applicants for health care service expansions, upgrades, relocations, or equipment purchases are required to demonstrate that the service is needed, that it is not duplicative, and that explorations have been made of the ways that the need can be met at the least cost. If a Michigan health care provider can effectively demonstrate need, then the CON Commission will issue a certificate. Generally a dollar threshold is set for facility upgrades and renovations so that smaller projects do not require a CON.

The issue of how excess capacity in the health care market impacts health care costs has been long debated and is heavily tied to the discussion of regulating facility costs through CON programs. Research on this topic dates back to at least the 1960s when states began adopting CON regulations and the federal government toyed with (and eventually mandated, then repealed) requirements for states to regulate health care facility costs. States, which are large health care spenders because of the Medicaid program, are incentivized to reduce overall health and medical costs; CON laws are one policy mechanism states may use to achieve this.

Rationale For and Against CON ProgramsProponents of CON programs argue that traditional supply and demand theory does not work in health care because providers, typically doctors and other health care professionals through their diagnosis and treatment decisions, have the predominant role in determining the demand for medical services. These providers are also paid for supplying the services they determine people need. Further, consumers often do not have sufficient information to make decisions based on cost and quality. Thus, there is a market failure and government intervention is thought necessary to limit competition and spending that would lead to artificially high demand for unnecessary services.

Opponents of CON programs argue that they artificially increase costs and shield health care providers from making costly investments that they might be more inclined to make in a more competitive environment. Some researchers and health care stakeholders believe that by shielding existing hospitals from new competitors, health care service supply is reduced to below competitive levels, thus increasing costs. Additionally, because CON programs block entry of new hospitals, incumbent hospitals may delay the adoption of new and improved technology or treatments because they may be more costly. New, higher quality service providers are locked out of the market which reduces competitive incentive to improve service quality.

Another argument deals with health care access. Without CON, health care providers can choose to reduce or eliminate health care service facilities in poorer, high need areas that may be less profitable because of higher rates of both uninsured patients and patients covered by insurance with low reimbursement rates such as Medicaid. Instead, health care service supply will move to low need areas with a higher number of patients insured by higher paying private insurance. If this occurs, then health care services will be available based on ability and willingness to pay and rather than the likelihood of medical need.

CRC’s report, The Michigan Certificate of Need Program, provides a state, national, and historical context for CON programs and details the coverage and scope of Michigan’s program, application process, and review standards. Finally, it discusses the issues of costs, quality, access, and other highly pertinent issues of the CON program, all of which are still being discussed today.